Prudential (BPI) v.

Rapanot

FACTS:
1. Certiorari: Rapanot complains against Golden Dragon Corporation, hereon GD, (owner of Wack-wack
Towers) for damages.
2. Rapanot paid GD reservation fee for a unit at the condominium.
3. Prudential Bank, on the other hand, extended a loan to GD to be utilized as additional working capital.
GD executed a Mortgage Agreement in favor of the bank constituting a real estate mortgage covering
several units still registered under them. This included Rapanot’s reserved unit.
4. Later, GD and Rapanot entered a Contract to Sell covering the unit he recently purchased. He
completed the payment in full and was issued the Deed of Absolute Sale.
5. Rapanot made several verbal demands on the unit. Prompted by these demands, GD sent a letter to
the Bank requesting substitution of collateral for the purpose of replacing the said unit with another of
the same area. However, the bank denied due to GD's unpaid accounts.
6. Rapanot requested several demands of formal delivery through his counsel of his unit but neither
Prudential nor GD complied.
7. Bank answered only when Rapanot raised this to HLURB however they only responded thru email with
the content "refuse to respond". So, HLURB made null and void the mortgage of Rapanot's unit. They
also directed the Registry of Deeds of Mandaluyong to cancel aforesaid mortgage. (Basically, they
ruled in favor of Rapanot)
8. Bank filed motions of reconsideration and contend that they were not given due process to answer.
This was denied by HLURB + CA because of their e-mail response of "refuse to receive".

ISSUE: WON CA erred that the Bank cannot be considered a mortgagee in good faith? (NO).

HELD: The doctrine of "mortgagee in good faith" is based on the rule that all persons dealing with property covered by a
certificate of title, as mortgagees, are not required to go beyond what appears on the face of the title. A person who
deliberately ignores a signi􏰂cant fact that could create suspicion in an otherwise reasonable person cannot be
deemed a mortgagee in good faith. The nature of the Bank's business precludes it from feigning ignorance of
the need to confirm that such requirements are complied with prior to the release of the loan in favor of Golden
Dragon, in view of the exacting standard of diligence it is required to exert in the conduct of its affairs.

In granting the loan, petitioner bank should not have been content merely with a clean title , considering the
presence of circumstances indicating the need for a thorough investigation of the existence of buyers like the
respondent. Having been wanting care and prudence, the latter cannot be deemed to be an innocent
mortgagee.

Petitioner cannot claim to be a mortgagee in good faith. Indeed it was negligent, as found by the Of􏰂􏰂ce of the
President and by the CA. Petitioner should not have relied only on the representation of the mortgagor that the
latter had secured all requisite permits and licenses from the government agencies concerned. The former
should have required the submission of certi􏰂􏰂ed true copies of those documents and veri􏰂􏰂ed their
authenticity through its own independent effort. Having been negligent in fi􏰂􏰂nding out what respondent's
rights were over the lot, petitioner must be deemed to possess constructive knowledge of those rights. Highest
degree of diligence is expected, and high standards of integrity and performance are even required of Banking
Institutions. In loan transactions, banks have the particular obligation of ensuring that clients comply with all the
documentary requirements pertaining to the approval of their loan applications and the subsequent release of
their proceeds.

If only the Bank exercised the highest degree of diligence required by the nature of its business as a 􏰂nancial
institution, it would have discovered that (i) Golden Dragon did not comply with the approval requirement
imposed by Section 18 of PD 957, and (ii) that Rapanot already paid a reservation fee and had made several
installment payments in favor of Golden Dragon, with a view of acquiring Unit 2308-B2. The Bank's failure to
exercise the diligence required of it constitutes negligence, and negates its assertion that it is a mortgagee in
good faith.

Rapanot, who was the buyer of the property, was not notified of the mortgage before the release of the loan
proceeds by petitioner. Acts executed against the provisions of mandatory or prohibitory laws shall be void.
Hence, the mortgage over the lot is null and void insofar as private respondent is concerned.
NOTES.

Under Presidential Decree No. 957 (PD 957), no mortgage on any condominium unit may be constituted by a developer
without prior written approval of the National Housing Authority, now HLURB. PD 957 further requires developers to notify
buyers of the loan value of their corresponding mortgaged properties before the proceeds of the secured loan are
released. The Mortgage Agreement cannot have the effect of curtailing Rapanot's right as buyer of Unit 2308-B2,
precisely because of the Bank's failure to comply with PD 957. Moreover, contrary to the Bank's assertions, it cannot be
considered a mortgagee in good faith. The Bank failed to ascertain whether Golden Dragon secured HLURB's prior
written approval as required by PD 957 before it accepted Golden Dragon's properties as collateral. It also failed to
ascertain whether any of the properties offered as collateral already had corresponding buyers at the time the Mortgage
Agreement was executed.

The Bank cannot harp on the fact that the Mortgage Agreement was executed before the Contract to Sell and Deed of
Absolute Sale between Rapanot and Golden Dragon were executed, such that no amount of veri􏰂cation could have
revealed Rapanot's right over Unit 2308-B2. The Court particularly notes that Rapanot made his initial payment for Unit
2308-B2 as early as May 9, 1995, four (4) months prior to the execution of the Mortgage Agreement. Surely, the Bank
could have easily veri􏰂ed such fact if it had simply requested Golden Dragon to con􏰂rm if Unit 2308-B2 already had a
buyer, given that the nature of the latter's business inherently involves the sale of condominium units on a commercial
scale.

Petitioner should have ascertained that the required authority to mortgage the condominium units was obtained from the
HLURB before it approved Golden Dragon's loan. It cannot feign lack of knowledge of the sales activities of Golden
Dragon since, as an extender of credit, it is aware of the practices, both good or bad, of condominium developers. Since
petitioner was negligent in its duty to investigate the status of the properties offered to it as collateral, it cannot claim that it
was a mortgagee in good faith.

PD 957. The relevant provision states: “Section 18. Mortgages. — No mortgage on any unit or lot shall be made by the
owner or developer without prior written approval of the Authority. Such approval shall not be granted unless it is shown
that the proceeds of the mortgage loan shall be used for the development of the condominium or subdivision project and
effective measures have been provided to ensure such utilization. The loan value of each lot or unit covered by the
mortgage shall be determined and the buyer thereof, if any, shall be noti􏰂ed before the release of the loan. The buyer
may, at his option, pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the
corresponding mortgage indebtedness secured by the particular lot or unit being paid for, with a view to enabling said
buyer to obtain title over the lot or unit promptly after full payment thereof.”

CA to Prudential. While a mortgagee is not under obligation to look beyond the certificate of title, the nature of petitioner's
business requires it to take further steps to assure that there are no encumbrances or liens on the mortgaged property,
especially since it knew that it was dealing with a condominium developer. It should have inquired deeper into the status
of the properties offered as collateral and veri􏰂ed if the HLURB's authority to mortgage was in fact previously obtained.
This it failed to do.

It has been ruled that a bank, like petitioner, cannot argue that simply because the titles offered as security were clean of
any encumbrances or lien, it was relieved of taking any other step to verify the implications should the same be sold by
the developer. While it is not expected to conduct an exhaustive investigation of the mortgagor's title, it cannot be excused
from the duty of exercising the due diligence required of banking institutions, for banks are expected to exercise more
care and prudence than private individuals in their dealings, even those involving registered property, for their business is
affected with public interest.

Land Bank v. Belle Corp. When the purchaser or the mortgagee is a bank, the rule on innocent purchasers or
mortgagees for value is applied more strictly. Being in the business of extending loans secured by real estate mortgage,
banks are presumed to be familiar with the rules on land registration. Since the banking business is impressed with public
interest, they are expected to be more cautious, to exercise a higher degree of diligence, care and prudence, than private
individuals in their dealings, even those involving registered lands.

Far East v. Marquez. Where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the
property, or any encumbrance thereon, the purchaser is not required to explore further EXCEPT where the purchaser or
mortgagee has knowledge of a defect or lack of title in the vendor, or that he was aware of sufficient facts to induce a
reasonably prudent man to inquire into the status of the property in litigation.